Returns On Capital Are Showing Encouraging Signs At Quest Diagnostics (NYSE:DGX)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Quest Diagnostics (NYSE:DGX) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Quest Diagnostics:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.16 = US$1.9b ÷ (US$13b - US$1.6b) (Based on the trailing twelve months to September 2022).

Thus, Quest Diagnostics has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 10% it's much better.

Check out our latest analysis for Quest Diagnostics

In the above chart we have measured Quest Diagnostics' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Quest Diagnostics is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 24% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Quest Diagnostics' ROCE

All in all, it's terrific to see that Quest Diagnostics is reaping the rewards from prior investments and is growing its capital base. And with a respectable 70% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 2 warning signs with Quest Diagnostics and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.